Industrial Minerals

Global fears over Chinese control of rare earth supply became reality this week as the country tightened its grip on exports for the second half of the year.

While many expected China – the world’s rare earths production hub – to cut exports gradually, the new quota announced last week has come as a short, sharp shock for consumers in the rest of the world.

China’s Ministry of Commerce cut its second-half quota by 70%, bringing its export limit for 2010 some 40% below last year’s figure (IM 9 July 2010: China slashes rare earth exports).

Meanwhile, two other new developments also look set to shake up the Chinese market, causing reverberations overseas.

Firstly, it was reported that the Chinese government plans to publish official monthly prices for rare earths mined in the southern provinces in a bid to prevent fierce competition between domestic producers.

Next, the National Development and Resource Commission proposed a 5% national resource tax to help develop poorer areas in the west of the country (IM 9 July 2010: China mulls new resource tax).

“Any of the announcements would have come as a surprise, but taken together they represent a watershed in the rare earths industry,” Australia-based rare earths expert Dudley Kingsnorth told IM.

“I believe that collectively the announcements give greater impetus to the development of rare earths outside China,” added Kingsnorth, executive director of the Industrial Minerals Company of Australia Pty Ltd (IMCOA).

Quotas slashed, no alternatives

The huge reduction in quotas for the second half means that official Chinese exports for 2010, at 30,259 tonnes, are now significantly lower than consumption in the rest of the world, estimated at 50-55,000 tonnes.

“Total production capacity [in the rest of the world] is currently 10-12,000 tpa at best, which indicates a shortfall this year of 10-15,000 tonnes,” said Kingsnorth.

Chinese rare earth oxide export quotas (tonnes)

There is no new rare earth capacity expected to come on stream to compensate for lost Chinese exports in the next year, with the two most advanced projects – being developed by Lynas Corp. in Australia and Molycorp Minerals in the USA – due to start up in Q3 2011 and mid-2012 respectively.

Mark Smith, CEO of Molycorp, also believes shortages could now be a reality in the near term (IM 12 July 2010: Molycorp on rare earth quotas).

"China is doing what it feels it must in order to maximise the value of their resources, improve product prices, improve their environmental practices and continue to create jobs in downstream manufacturing businesses in China, which have all been key policy goals of that nation,” Smith told IM.

“These additional and very significant decreases in export quotas are clearly troubling, given that it appears that rest of world demand will now exceed what China is willing to export. We are very concerned that the rest of the world could face actual near-term shortages of rare earths,” he added.

Prices set to rocket

The most immediate effect of the quota cuts seems to be the impending significant price hikes for rare earths sourced from China.

In the last week, prices for oxides of lanthanum, cerium, neodymium, praseodymium and europium (FOB China) have all crept up, according to market sources.

Price hikes for many rare earth products have already been staggering this year, with neodymium and praseodymium oxides both more than doubling in value since Q1 2010 to a $38-39/kg range today.

Kingsnorth commented: “Prices are likely to rise significantly... it appears many people recognised that the quotas would be reduced significantly, as prices have risen by 10-20% [in the last six weeks].

The impact on the prices of different rare earth elements will be disparate, with exporters likely to maximise revenues by selling higher-value rare earths such as terbium, europium and dysprosium.

This could push potential supply shortages to the cheaper end of the spectrum, with exports of the lighter elements – lanthanum, cerium, neodymium and praseodymium – hit disproportionately hard.

A buyer of Chinese rare earths told IM: “We need to maximise our dollar margins and export value-added rare earth products to maximise and utilise the quota for the highest-margin products, and minimise the low-value exports. We may have to ration back some customers as a result.”

Processors with a base in China may benefit from the developments as exports of value-added rare earth products, such as magnetic powders, are not subject to the quota system. Such groups will benefit from any decline in domestic rare earth prices as more material is channeled into local industries.

A processor explained to IM: “The quotas will cause an imbalance in the market, meaning that a larger volume of rare earths that cannot be sold internationally due to lack of quotas will remain in China, driving domestic prices down, and thus lowering the raw material cost for the rare earth separators.”

China’s illegal mining clampdown

The increased value of exporting material is likely to spur on illegal mining and exporting, which is rife in the southern provinces of China.

In May, China announced a six-month clampdown on the illegal mining of rare earths, saying it would destroy mines, confiscate equipment and cut off water and power supplies to stop the illegal activity (IM 21 May 2010: China targets illegal RE mining).

The government appears to have claimed its first major scalp, with Chinese customs authorities this week arresting seven people suspected of being involved in smuggling in the southern region of Guangxi.

According to Xinhua news agency, the suspects were thought to be carrying 4,196 tonnes of material valuing RMB 109m. ($16m.): a significant amount in such a low-volume market.

While the second half quotas are alarming, they will provide motivation for economies outside of China – particularly Japan, the USA and the EU – to invest in alternative supplies and technologies (IM 4 June 2010: Neodymium in US spotlight).

There is also no guarantee that quotas will remain at such low levels, with China’s biannual announcements following no clear pattern: the first half 2010 quota was actually increased year on year.

It has also been reported that Japan, a major rare earth importer, could call upon China to reconsider the new quotas.

While the announcement is bad news for consumers of rare earths, it will encourage the new wave of rare earth project developers outside China that there is room in the market (IM June 2010: Shock & Ore).

Kingsnorth concluded: “There are only two projects that have all the necessary approvals in place to take advantage of this opportunity in the next 2-3 years. The other potential projects have a timeline of at least five years to production; so we are in for some interesting times."